ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 41  May 2021 CPA Licensure Examination  Weeks 12-15
REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS
Atty. J. Domingo  Atty. N. Soriano
RFBT-07: LAW ON PRIVATE CORPORATIONS &
THE SECURITIES REGULATION CODE
I.
DEFINITION, ATTRIBUTES AND CLASSES
DEFINITION: A corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its existence.
ATTRIBUTES:
1. ARTIFICIAL BEING – it has a juridical personality, separate and distinct from the persons composing it.
CORPORATE ENTITY THEORY
As a legal entity, the corporation is possessed with a juridical personality separate and distinct from the
individual stockholders or members and is not affected by the personal rights, obligations or transactions of
the latter.
PIERCING THE VEIL OF CORPORATE ENTITY: The applicability of the corporate entity theory is confined
to legitimate transactions and is subject to equitable limitations to prevent its being used as a cloak or
cover for fraud or illegality, or to work injustice.
When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend
crime, the law will regard the corporation as a mere association of persons, or in the case of two
corporations, merge them into one, the one being merely regarded as part or instrumentality of the other.
The same is true where a corporation is a mere dummy and serves no business purpose and is intended
only as a blind, or an alter-ego or business conduit for the sole benefit of the stockholders.
In cases where the doctrine of piercing the veil of corporate fiction, the concept of a separate juridical
personality shall be set aside.
2. CREATED BY OPERATION OF LAW – the formal requirement of the State’s consent through compliance
with the requirements imposed by law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the grant of its independent existence as
a juridical entity;
COMMENCEMENT OF CORPORATE EXISTENCE: is at the time of the issuance of the Certificate of
Incorporation or Registration. It is only from this time that it acquires juridical personality and legal
existence, EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Sole Corporation – which is reckoned from the filing of verified articles.
3. RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity or civil interdiction of one or more
of its stockholder does not result in its dissolution; this is otherwise referred to as the corporation’s “strong”
juridical personality.
4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTDHORIZED BY LAW – it can exercise only
such powers and can hold only such properties as are granted to it by the enabling statutes unlike natural
persons who can do anything as they please.
Powers of a corporation:
a. Express Powers – those expressly authorized by the Corporation Code and other laws, and its Articles of
Incorporation.
b. Implied Powers – Those that can be inferred from or necessary for the exercise of EXPRESS powers;
c. Incidental Powers – those that are incidental to the existence of the corporation.
Under the Corporation Code, a Corporation has power and capacity:
a. To sue and be sued in its corporate name;
b. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate of incorporation;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation in accordance with the provisions of this Code;
e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and
to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities and bonds of other corporations, as the transaction
of the lawful business of the corporation may reasonably and necessarily require, subject to the
limitations prescribed by law and the Constitution;
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RFBT-07
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 12-15: LAW on PRIVATE CORPORATIONS & THE SECURITIES REGULATION CODE
h.
To enter into merger or consolidation with other corporations as provided in this Code (now, a
corporation can also enter into a partnership and joint venture);
i.
To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, that no corporation, domestic or foreign (now only
foreign), shall give donations in aid of any political party or candidate or for purposes of partisan
political activity;
(1) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and
employees; and
(2) Implied Powers: To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation.
ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation because they are
not within its express, inherent, or implied powers as defined by its charter or AOI. Accordingly, it may be
subject to a collateral attack questioning the authority of the corporation to engage in such particular
endeavor.
CLASSES OF CORPORATIONS:
STOCK CORPORATIONS
NON-STOCK
CORPORATIONS
Corporations which have capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends or allotments of the surplus profits
on the basis of the shares held are stock corporations.
Corporations which are not authorized to distribute surplus profits.
DOMESTIC
CORPORATION
FOREIGN CORPORATION
are those organized or created under or by virtue of the Philippine laws, either by
legislative act or under the provisions of the General Corporation Law.
are those formed, organized or existing under any laws other than those of the
Philippines
CLOSE CORPORATIONS
are those whose shares of stock are held by a limited number of persons like the
family or other closely-knit group. There are no public investors and the
shareholders are active in the conduct of the corporate affairs.
are those formed to openly accept outsiders as stockholders or investors. They are
authorized and empowered to list in the stock exchange and to offer their shares to
the public such that stock ownership can widely be dispersed. In which case, they
are called PUBLICLY-LISTED CORPORATIONS.
OPEN CORPORATIONS
PRIVATE CORPORATIONS
PUBLIC CORPORATIONS
ECCLESIASTICAL
CORPORATIONS
LAY CORPORATIONS
AGGREGATE
CORPORATIONS
CORPORATION SOLE
those formed for some private purpose, benefit, aim or end. They are created for
the immediate benefit and advantage of the individuals or members composing it
and their franchise may be considered as privileges conferred by the State to be
exercised and enjoyed by them in the form of the corporation.
those formed or organized for the government of a portion of the State or any of its
political subdivisions and which have for their purpose the general good and welfare.
are composed exclusively of ecclesiastics organized for spiritual purposes or for
administering properties held for religious ones. They are organized to secure public
worship or perpetuating the right of a particular religion.
are those organized for purposes other than religion. They may further be classified
as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such as those
organized for the purpose of maintaining hospitals and houses for the sick, aged or
poor.
b. CIVIL: organized not for the purpose of public charity but for the benefit,
pecuniary or otherwise, of its members.
are those composed of a number of individuals vested with corporate powers.
those consist of one person or individual only and who are made as bodies corporate
and politic in order to give them some legal capacity and advantage which, as
natural persons, they cannot have. Under the Code, a corporation sole may be
formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding
elder or religious denominations, sects or churches.
Classes of Corporations according to validity of formation:
Compliance with requirements for valid
incorporation
De Jure
Corporation
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Full compliance
Separate and
distinct personality
from stockholders
Yes
Questioning the personality
of the corporation
Direct
Collateral
Attack*
Attack**
No
No
RFBT-07
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 12-15: LAW on PRIVATE CORPORATIONS & THE SECURITIES REGULATION CODE
De Facto
Corporation
Corporation
by Estoppel
Requisites for existence:
1. There exists a valid law under which it
may be incorporated;
2. An attempt in good faith to
incorporate (colorable compliance)
3. Use of corporate powers
No compliance at all. The persons who
compose it only set themselves out as a
corporation.
Yes
Yes, via
quo
warranto
No
None, stockholders
are liable as general
partners
Yes
Yes
Direct Attack: means the very subject of the case is the legal existence or personality of the corporation. This is
allowed in a de facto corporation via a quo warranto proceeding.
Collateral Attack: means that the main subject of the case is other than attacking the personality of the
corporation, but it is questioned as a side subject.
ILLUSTRATION: Mr. X was invited by his friends to invest in XYZ Corp., a newly organized firm where he was
appointed president. He entered into a contract of sale with ABC Corp. to purchase equipment, in accordance
with the primary purpose of the corporation. Later on, however, it was discovered that the Articles of
Incorporation had not been filed by his friends. He hurriedly attended to the matter and when the SEC issued
the Certificate of Registration, the corporation became bankrupt and Mr. X is now being sued by ABC Corp. in
his personal capacity for breach of contract. Mr. X invoked the corporate entity theory that the corporation has
a personality separate and distinct from him. Thus, he should not be liable in a contract where he signed only in
his capacity as President. Is Mr. X correct?
ANSWER: No. Since the Articles of Incorporation was not filed, there is no attempt in good faith to incorporate.
Thus, it is neither a de jure or de facto corporation, but a corporation by estoppel only. Accordingly, it does not
have a personality distinct and separate from the supposed stockholders. Mr. X can be held liable in his
personal capacity.
Note also that the personality of the corporation was validly questioned collaterally, since the main subject of
the case is breach of contract. This is valid since it is a corporation by estoppel. If it did qualify as de jure or de
facto, there could not have been a valid collateral attack on its personality.
1. An
A.
B.
C.
D.
ultra vires act is an act or a transaction of a corporation which:
Is considered illegal
Is contrary to morals, public policy, good customs
Not within the express, implied or incidental powers of the corporation
All of the above
2. Under the Revised Corporation Code, a foreign corporation has power and capacity to do all of the following,
except:
A. Form joint ventures
B. Adopt and use a corporate seal
C. Give aid for political partisan activities
D. Acquire properties in its own name
3. Under the Revised Corporation Code, a foreign corporation has power and capacity to do all of the following,
except:
A. Form joint ventures
B. Adopt and use a corporate seal
C. Give aid for political partisan activities
D. Acquire properties in its own name
4. Mr. X was invited by his friends to invest in XYZ Corp., a newly organized firm where he was appointed
president. He entered into a contract of sale with ABC Corp. to purchase equipment, in accordance with the
primary purpose of the corporation. Later on, however, it was discovered that the Articles of Incorporation
had not been filed by his friends. He hurriedly attended to the matter and when the SEC issued the
Certificate of Registration, the corporation became bankrupt and Mr. X is now being sued by ABC Corp. in
his personal capacity. In this case,
A. Mr. X cannot be made liable since XYZ Corp. is considered a de facto corporation which has a separate
personality.
B. Mr. X cannot be made liable since the de facto status of the corporation has not been attacked by the
State.
C. Mr. X can be made liable upto his personal assets since he is the president of XYZ Corporation which is
a corporation by estoppel.
D. Mr. X can be made liable only upto his investment since he had no knowledge that the corporation was
not validly incorporated.
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5. Mr. X invested his property in exchange for shares in ABC Corporation. Later on, the same property
mortgaged as security for the loan of ABC Corporation from M Bank. For failure to pay, the mortgage was
foreclosed and proceeds were less than the amount of the outstanding balance of the loan which M Bank
sought from Mr. X contending that the property was invested by him. Mr. X cannot be made liable under
which principle:
A. Corporate Entity Theory
B. Piercing the Veil of Corporate Entity
C. Limited Liability Principle
D. All of the above
II. ORGANIZATION AND INCORPORATION
1. PROMOTIONAL STAGE: undertaken by the organizers or promoters who bring together persons interested
in the business venture. They enter into contract either in their own names or in the name of the proposed
corporation.
A promoter, although he may assume to act for and on behalf of a projected corporation and not for
himself, will be held personally liable on contracts made by him for the benefit of a corporation he intends
to organize. The personal liability continues even after the formation of the corporation unless there is
novation or other agreement to release him from liability.
2. PROCESS OF INCORPORATION: includes the drafting of the Articles of Incorporation, preparation and
submission of additional and supporting documents, filing with the SEC, and the subsequent issuance of the
Certificate of Incorporation.
Contents of the Articles of Incorporation:
a.
The name of the corporation;
The name of the corporation is essential to its existence since it is through it that it can act and perform
all legal acts. Each corporation should therefore, have a name by which it is to sue and be sued and do
all legal acts.
Thus, the organizers must make sure that the name they intend to use as a corporate name is not
similar or confusingly similar to any other name already registered and protected by law since the
SEC would refuse registration if such be the case.
This requirement is now specifically indicated in the Revised Corporation Code.
b. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which
is the primary purpose and which is/are the secondary purpose or purposes: Provided, that a
non-stock corporation may not include a purpose which would change or contradict its
nature as such;
The statement of the objects or purpose or powers in the charter results practically in defining the scope
of authority of the corporate enterprise or undertaking. This statement both congers and also limits the
actual authority of the corporate representatives.
The reasons for requiring a statement of the purposes or objects:
1. In order that the stockholder who contemplates on an investment in a business enterprise shall
know within what lines of business his money is to be put at risks;
2. So that the board of directors and management may know within what lines of business they are
authorized to act; and
3. So that anyone who deals with the company may ascertain whether a contract or transaction into
which he contemplates entering is one within the general authority of the management.
SECONDARY PURPOSE: Although the Corporation Code does not restrict nor limit the number of
purpose or purposes which a corporation may have, Sec. 14 thereof, requires that if it has more than
one purpose, the primary purpose as well as the secondary ones must be indicated therein.
GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or general terms;
3. If there is more than one purpose, the primary as well as the secondary ones must be specified; and
4. The purposes must be capable of being lawfully combined
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c.
The place where the principal office of the corporation is to be located, which must be within
the Philippines;
It must be located within the Philippines. The AOI must not only specify the province, but also the City
or Municipality where it is located.
The principal office serves as the residence of the corporation and is thus important in:
i. venue of actions;
ii. registration of chattel mortgage of shares;
iii. validity of meetings of stockholders or members in so far as venue thereof is concerned.
d. The term for which the corporation is to exist;
General Rule (prior to amendment): upto 50 years.
EXTENSION: can be made no earlier than 5 years prior to expiry date unless there are justifiable
reasons (now 3 years)
AMENDENT: a corporation now generally has perpetual existence since the Revised Corporation
Code removed the limitation of 50 years.
This equally applies to already existing corporations, except if by majority vote of its stockholders, it
notifies the SEC to retain its specific corporate term.
Revival: Also under Sec. 11, after the expiration of the corporate term, a corporation may file for
revival of its corporate existence. Upon approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence,
unless its application for revival provides otherwise.
e. The names, nationalities and residences of the incorporators;
CORPORATORS apply to all who compose the corporation at any given time and need not be among
those who executed the AOI at the start of its formation or organization.
INCORPORATORS are those mentioned in the AOI as originally forming the corporation and who are
signatories in the AOI.
An incorporator may be considered as a corporator as long as he continues to be a stockholder or a
member, but not all corporators are incorporators.
Number of Incorporators: not less than 5 but not more than 15 (now, “not more than 15”)
Qualifications:
1. Must be natural persons (now can also include a partnership, association or corporation)
2. Of Legal Age (still a requirement for natural person-incorporators under SEC MC No. 16-2019)
3. Must own or subscribe to at least 1 share.
4. Majority must be residents of the Philippines (already removed)
f.
The number of directors or trustees, which shall not be less than five (5) nor more than
fifteen (15);
DIRECTORS compose the governing board in stock corporations. TRUSTEES pertain to non-stock
corporations.
AMENDMENTS:
1. The number of directors as indicated in the Articles is “not more than 15”, while for trustees,
“may be more than 15”
2. Section 22 of the RCC, the following corporations vested with public interest shall have
independent directors constituting at least 20% of such board:
a. Corporations covered by the Securities Regulations Code;
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business,
pre-need, trust and insurance companies, and other financial intermediaries; and
c. Other corporations engaged in business vested with public interest similar to the above, as may
be determined by the SEC.
An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship which
could, or could reasonably be perceived to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director.
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g. The names, nationalities and residences of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance with
this Code;
h. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the
Philippines, the number of shares into which it is divided, and in case the share are par value
shares, the par value of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his subscription, and if some or
all of the shares are without par value, such fact must be stated;
The Corporation Code requires the AOI to state the authorized capital stock, the number of shares
and/or kind of shares into which the authorized capital is divided, the par value of each share, if there
be any, the names, nationalities and residences of the original subscribers, and the amount subscribed
and paid by each. At least 25% of the authorized capital stock must be subscribed and at least 25% of
the subscribed capital must be paid and in no case may the paid-up capital be less than P5,000.
The 25% minimum paid-in capital can be paid by any shareholder, meaning that it is not particularly
required that each subscriber pay 25% of their subscription.
This requirements has already been removed under the Revised Corporation Code, but still
applies to increase in authorized capital stock.
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles to be subscribed and paidin or secured to be paid by the subscribers. It may also refer to the maximum number of shares that a
corporation can issue.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total value for which there are
contracts for their acquisition or subscription. It is in effect, the stockholder’s equity account showing
that part of the authorized capital stock which has been paid or promised to be paid, or that portion of
the authorized capital stock which has been subscribed by the subscribers or stockholders.
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value which has been actually
contributed or paid to the corporation in consideration of the subscriptions made thereon.
Considerations for stocks:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and necessary or convenient
for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock
issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
AMENDMENT: Consideration for stocks under Section 61 (formerly Section 60) now includes:
1.
Shares of stock in another corporation; and/or
2.
Other generally accepted form of consideration.
Note:

Stocks cannot be issued for a consideration less than the par or issue price thereof.

Promissory notes or future service cannot be considered valid consideration for stocks.
OUTSTANDING CAPITAL STOCK: total number of shares issued, including those which are subscribed
and not yet fully paid, but excluding treasury shares.
i.
If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and
j.
Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.
RESTRICTIONS AND PREFERENCES:
If the corporation desires to grant such options, restrictions and/or preferences, the same must be
indicated in the AOI AND in all of the stock certificates. Failure to provide the same in the AOI would
not bind the purchasers in good faith despite the fact that the said restriction and/or preference is
indicated in the by-laws of the corporation.
In a close corporation, however, such restrictions and preferences must not only appear in the articles
of incorporation and in the stock certificates BUT ALSO be embodied in the by-laws of that close
corporation otherwise it may not bind purchasers in good faith.
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OTHER MATTERS TO BE INDICATED IN THE ARTICLES OF INCORPORATION:
1. The name of the Treasurer duly elected by the subscribers
2. No Transfer Clause: in case a corporation is required to maintain a required minimum Filipino
ownership, committing that no transfer shall be made which shall reduce the ownership of Filipino
citizens to less than the required percentage.
3. The Execution Clause: which will contain the names and signatures of the incorporators
4. Treasurer’s Affidavit which contains the certification of the Treasurer, under oath, that the required
25% of the authorized capital stock has been subscribed, 25% of the subscription has been paid, in
an amount not less than P5,000.
5. Notarial Acknowledgment
AMENDMENT: The following were specifically included as those who would be needing a favorable
recommendation from the concerned government agency:
1.
Non-Stock Savings and Loans Associations; and
2.
Pawnshops.
On the other hand, the following were removed from the enumeration of entities requiring favorable
recommendations:
1.
Educational Institutions; and
2.
Other corporations governed by special laws.
AMENDMENT OF THE ARTICLES OF INCORORPATION, IN GENERAL WOULD REQUIRE:
a. Majority approval of the members of the Board;
b. Written assent of stockholders representing 2/3 of the outstanding stocks
c. Approval of the SEC. If the SEC did not act on the application within 6 months from the date of filing,
the amended is deemed approved.
6. Under the Revised Corporation Code, a corporation has:
A. A maximum of 50 years of existence
B. A maximum of 50 years of existence but renewable not earlier than 5 years prior to expiration of the
term
C. A maximum of 50 years of existence but renewable not earlier than 3 years prior to expiration of the
term
D. Perpetual existence
7. Which of the following is still a requirement that applies to incorporators under the Revised Corporation
Code:
A. Majority must be residents of the Philippines
B. Must be natural persons
C. Natural persons must be of legal age
D. None of the choices
8. A, B, C, D and E is organizing a corporation whose Authorized Capital Stock is P64,000. How much is the
minimum paid-up capital requirement under the Revised Corporation Code for the corporation to
incorporate?
A. P0
B. P4,000
C. P5,000
D. P16,000
9. A restriction as to transfer of shares in an ordinary stock corporation must be indicated in:
I. Articles of Incorporation
II. By-Laws
III. Certificate of Stock
A.
B.
I, II and III
I and II
C. I and III
D. II and III
10. The existence of a corporation sole begins from:
A. The time the parties came to an agreement to form a corporation and contribute money or property.
B. Filing of the verified articles of incorporation.
C. Issuance of a certificate of registration.
D. First day of the year following the filing of the Articles of Incorporation
III. BOARD OF DIRECTORS
The Board of Directors (or trustees or other designation allowed under Sec. 138) is the supreme authority in
matter of management of the regular and ordinary business affairs of the corporation.
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However, this authority does not extend to the fundamental changes in the corporate charter such as
amendments or substantial changes thereof, which belong to the stockholders as a whole.
Classification of powers of the board members/corporate officers: The general rule is that a
corporation is bound by the acts of its corporate officers who act within the scope of the
classifications of powers of corporate agents, which are:
1. Those expressly conferred or those granted by the articles of incorporation, corporate by-laws or by the
official act of the board of directors;
2. Those that are incidental or those acts as are naturally and ordinarily done which are reasonable and
necessary to carry out the corporate purpose or purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually granted, the principal knowingly allows
or permits it to be done; and
5. Powers arising out of customs, usage or emergency
QUALIFICATIONS AND DISQUALIFICATIONS: The by-laws of a corporation may provide for additional
qualifications and disqualifications of its members of the board of directors or trustees. However, it may not do
away with the minimum qualifications and disqualifications.
Qualifications of a Director/Trustee:
1. Must own at least 1 share in their own names or a member (in the case of trustees);
2. Majority must be resident of the Philippines. Even aliens may be elected as directors, provided that the
majority of such directors are residents of the Philippines. EXCEPT: in activities exclusively reserved to
Filipino citizens like the management of educational institutions and those governed by the Retail Trade Law
Disqualifications of a Director/Trustee: A person shall be disqualified from being a director, trustee or
officer of any corporation:
1. If, within 5 years prior to election or appointment as such, the person was Convicted by Final Judgment
a. Of an offense punishable by imprisonment for a period exceeding 6 years;
b. Violation of the Corporation Code;
c. Violation of the Securities Regulations Code
2. Found administratively liable for any offense involving fraud acts; and
3. By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similar to the disqualifications under the Code.
4. Such other disqualifications that may be provided in the by-laws.
AMENDMENT: Items underlined are new disqualifications provided under the Revised Corporation Code.
ELECTION OF MEMBERS OF THE BOARD/TRUSTEES
1. Majority of the outstanding capital stock, whether in person or by written proxy must be present at the
election of the directors; or majority of members entitled to vote, in the case of a non-stock corporation. If
the required quorum is not obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the election may be held by ballot otherwise vivavoce would suffice.
3. The candidates receiving the highest number of votes shall be elected
Report Requirement: Section 25 of the RCC requires a report within 30 days to be submitted to the SEC in
case of non-holding of elections, which shall include a new date for the election, which shall not be later than 60
days from the scheduled date.
If no new date has been designated, or if the rescheduled election is likewise not held, the SEC may, upon the
application of a stockholder, member, director or trustee, summarily order that an election be held.
Should a director, trustee or officer die, resign or in any manner cease to hold office, the secretary, or the
director, trustee or officer of the corporation, or in case of death, the officer’s heirs shall, within seven (7) days
from knowledge thereof, report in writing such fact to the SEC.
METHODS OF VOTING:
1. Straight Voting – every stockholder may vote such number of shares for as many persons as there are
directors to be elected
2. Cumulative Voting:
a. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as
the number of directors to be elected multiplied by the number of his shares shall equal (Cumulative
Voting for one candidate) or he may distribute them among the candidates as he may see fit
(Cumulative voting by distribution)
b. This is granted by law to each stockholder with voting rights. However, in non-stock corporations,
cumulative voting is generally not allowed, UNLESS allowed by the AOI or by-laws.
c. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have 10,000
votes which he may cast in favor of one candidate or may apportion to any number of candidate he may
wish
d. PURPOSE: to allow the minority to have a rightful representation in the board of directors.
e. Cumulative voting is not available in non-stock corporations.
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REMOVAL AND FILLING-UP OF VACANCIES
1. By-laws may provide for causes or grounds for removal of a director;
2. A director representing the minority may not be removed except for those causes;
3. A director NOT representing the minority may be removed even without a cause.
AMENDMENT: The SEC is now empowered to motu proprio (not just upon verified complaint) and after due
notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an election.
Requirements for a valid removal:
1. The removal should take place at a general or special meeting duly call for that purpose;
2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding capital
stock or the members entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the intention to propose such removal
at the meeting either by publication or on written notice to the stockholders or members.
Vacancy:
CAUSE OF VACANCY
WHO WILL FILL THE VACANCY
WHEN ELECTION WILL BE
HELD*
Same day of the meeting
authorizing the removal
Removal
Stockholders
Expiration of the term
Stockholders
No later than the day of such
expiration at a meeting called
for that purpose
Other causes (death,
resignation,
abandonment)
Board of Directors – if they still
constitute a quorum;
No later than 45 days from the
time the vacancy arose
Increase
in
the
number of Directors
Stockholders – if the Directors no
longer constitute a quorum
Stockholders
Same day of the meeting
authorizing the removal
AMENDMENTS: Section 28 of the RCC now provides when* should the election of the replacement member of
the Board will be held.
Replacement of Hold-Over Directors: in the event that a director, after the expiration of his term is not
replace since there was no election held, such director can continue to function in a holdover capacity. However,
if he resigns, the stockholders will be the one to replace him even if the remaining directors continue to
constitute a quorum. Note that the power of the Board to fill up the vacancy is only if the director resigns before
the expiration of his term. In this instance, the term of the director already expired, he just continued as such
only in a hold-over capacity.
EMERGENCY BOARD: When the vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation,
the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote
of the remaining directors or trustees.
The action by the designated director or trustee shall be limited to the emergency action necessary, and the
term shall cease within a reasonable time from the termination of the emergency or upon election of the
replacement director or trustee, whichever comes earlier. The corporation must notify the SEC within 3 days
from the creation of the emergency board, stating therein the reason for its creation.
Compensation of Directors/Trustees: General Rule: Directors are not entitled to receive any compensation
this is because the office of a director is usually filled up by those chiefly interested in the welfare of the
institution by virtue of their interest in stock or other advantages and such interests are presumed to be the
motive for executing duties of the office without compensation. Except:
1. Reasonable per diems;
2. As provided in the by-laws
3. Upon a majority vote of the stockholders; and
4. If they are performing functions other than that of a director.
Limit: In no case shall the total yearly compensation of the directors (except number 4 above), exceed 10% of
the net income before tax of the corporation during the preceding year. (Section 30)
AMENDMENT: Section 29 of the RCC now specifically prohibits the Director/Trustee from participating in
the fixing of their own per diems or compensation.
Likewise, the same section requires corporations vested with public interest to submit to their shareholders and
the Commission, an annual report of the total compensation of each of their directors or trustees.
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CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in the position of a fiduciary and
prohibits him from seizing a business opportunity and/or developing it at the expense and with the facilities of
the corporation. He cannot appropriate to himself opportunity which in fairness should belong to the
corporation.
Ratification:
1. The second paragraph of Sec. 31 which makes a director liable to account for profits if he attempts to
acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to
ratification.
2. Whereas, in Sec. 34, if a director acquires a business opportunity which should belong to the corporation,
he is bound to account for such profits unless his act is ratified by the stockholders owing or representing at
least 2/3 of the outstanding capital stock.
Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value
of P100M for P90M.
a. If it was offered first to A, and A made a profit of P90M, this would fall under Sec. 34 and may be subject to
ratification; A merely acquired a business opportunity owing to the corporation.
b. If it was offered to REALTY CORP., and A, later on offered to buy it for P95 and sold it making a profit of
P5M, it would fall under Sec. 31 and not subject to ratification, A should return the profits to REALTY CORP.
It was a matter reposed in him in confidence.
SELF-DEALING DIRECTORS: is one who deals or transacts business with his own corporation.
Generally, A contract entered into by a director with his own corporation is voidable at the latter’s option,
except
1. That the presence of such director or trustee in the board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the approval of the contract (see amendment
below);
The approval for transactions of self-dealing directors of corporations vested with public interest, under
the Revised Corporation Code, shall require:
a. At least two-thirds (2/3) of the entire membership of the board, with
b. At least a majority of the independent directors
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.
On the other hand, where any of the first two conditions is absent, the contract becomes voidable subject to the
ratification of the stockholders representing 2/3 of the outstanding capital stock – the requirements of which
are: (1) there must be a meeting called for that purpose; (2) full disclosure of the adverse interest of the
director; and (3) the contract is fair and reasonable under the circumstances.
If the self-dealing director owns all or substantially all of the shares of stock, thereby making ratification easily
possible, the reasonableness of the transaction shall be determined - to which there is no yardstick and remains
to be a question of fact depending on the circumstances.
INTERLOCKING DIRECTOR: is a director in one corporation who deals or transacts with another corporation
of which he is also a director. In such case, there may effectively be a dual agency, a divided allegiance where
allegiance in one corporation may be subordinated to the other.
1. The contract between corporations with interlocking director is valid absent fraud and provided it is
reasonable under the circumstances;
2. If the interest of the interlocking director in one corporation exceeds 20% and in the other merely
nominal, the contract becomes voidable at the latter corporation’s option. In effect, the director would be
treated as a self-dealing director discussed above.
3. If the interest in both companies is either both substantial or both nominal, no. 1 would apply (i.e., valid).
REMEDIES AGAINST ERRING OFFICERS/DIRECTORS: In case of a wrongful or fraudulent act of a director,
officer or agent, stockholders have the following options:
1. Individual or Personal Action – for direct injury to his rights, such as denial of his right to inspect corporate
books and records or pre-emptive rights;
2. Representative or Class Suit – in which one or more members of a class sue for themselves as a class or for
all to whom the right was denied, either as an individual action or a derivative suit; and a
3. Derivative Suit – an action based on injury to the corporation – to enforce a corporate right – wherein the
corporation itself is joined as a necessary party, and recovery is in favor of and for the corporation. It is a
suit granted to any stockholder to institute a case to remedy a wrong done directly to the corporation and
indirectly to stockholders.
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The requisites for a derivative suit are as follows:
a. the party bringing suit should be a shareholder as of the time of the act or transaction complained of,
the number of his shares not being material;
b. he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for
the appropriate relief but the latter has failed or refused to heed his plea; and
c. the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being
caused to the corporation and not to the particular stockholder bringing the suit.
EXECUTIVE COMMITTEE: The by-laws of a corporation may create an executive committee, composed of not
less than three members of the board, to be appointed by the board.
Said committee may act, by majority vote of all its members, on such specific matters within the competence of
the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to:
1. Approval of any action for which shareholders’ approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of bylaws or the adoption of new by-laws;
4. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or
repealable; and
5. A distribution of cash dividends to the shareholders.
AMENDMENT: The board of directors may create special committees of temporary or permanent nature and
to determine the members’ term, composition, compensation, powers, and responsibilities.
IV. CORPORATE OFFICERS
ELECTION OF CORPORATE OFFICERS: Except in a close corporation where the corporate officers may be
elected directly by the stockholders, the Code requires the BOD to elect the said officers;
The officers that may be elected are the:
1. President – who must be a director;
2. Treasurer – who may or may not be a director (now, required to be a resident of the Philippines);
3. Secretary – who should be a resident and citizen of the Philippines;
4. Such other officers as may be provided for in the by-laws.
AMENDMENT: Compliance Officer – is now a required corporate officer in corporations vested with public
interest.
Any two or more positions may be held concurrently by the same person, except:
1. The president and the secretary;
2. The president and the treasurer.
AUTHORITY OF CORPORATE OFFICERS TO ACT IN BEHALF OF THE CORPORATION: a corporate officer
or agent may represent and bind the corporation in transactions with third person to the extent that authority
has been conferred upon him, and this includes powers which have been:
1. intentionally conferred, and
2. also, such powers as, in the usual course of business, are incidental thereto, or may be implied therefrom,
3. powers added by custom and usage, as usually pertaining to the particular officer or agent, and
4. such apparent powers as the corporation has caused persons dealing with the officer or agent to believe
that it has conferred
LIABILITY OF CORPORATE OFFICERS: The general rule is that unless the law specifically provides a
corporate officer or agent is not civilly or criminally liable for acts done by him as such officer or agent, or when
absent bad faith or malice.
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) gross negligence in
directing its affairs, or (d) conflict of interest, resulting in damages to the corporation, its stockholders or
other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
4. He is made, by a specific provision of law, to personally answer for his corporate action.
ELECTION OF CORPORATE OFFICERS: require the majority of ALL MEMBERS of the Board, not just the usual
majority of those present in the meeting. Meaning, if there are 15 members of the Board, and 9 are present, 8
votes would be necessary to elect a corporate officer.
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11. The following are qualifications of a Director, except:
A. They must own at least 1% share.
B. They meet all the qualifications under the by-laws
C. They do not possess any of the disqualifications under the Corporation Code.
D. None of the choices is an exception
12. A, is a stockholder of Silvestre Corporation, who holds 10,000 shares thereof. A stockholders meeting was
called to elect members of a 5-man Board. How many votes can A cast in favor of B if they employ
cumulative voting?
A. 10,000 votes
C. 50,000 votes
B. 25,000 votes
D. 100,000 votes
13. A, B, C, D and E are members of the Board of Directors. A retired and D died. In this case, who shall fill-up
the vacancy?
A. Stockholders in a meeting called for the purpose, regardless if the directors still have a quorum
B. A, B and C, since they still constitute a quorum
C. A, B and C, regardless if they still constitute a quorum
D. Stockholders in a meeting called for the purpose since the directors no longer have a quorum
14. A, B, C, D, E, F, G, H, I are members of the Board of Directors. In the meeting to appoint corporate officers,
only A, B, C, D and E are present. How many votes are required to elect corporate offices?
A. 2
C. 4
B. 3
D. 5
15. A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value of
P100M for P90M. Z offered the property first to A, who acquired it for P90M and eventually sold the same
for P100M. In this case,
A. A can keep the profits provided the sale is ratified by the stockholders.
B. A can keep the profits because it was offered to him and not to REALTY CORP.
C. The sale is not subject to ratification and A may be required to remit the profits to REALTY CORP
D. None of the above
16. Mr. X is a Director of both XYZ Corporation and ABC Corporation. XYZ and ABC entered into a contract of
sale, the contract between XYZ and ABC, is considered valid absent fraud and provided it is reasonable
under the circumstances. But it is considered voidable if the shareholdings of Mr. X in the two corporations
are:
A.
B.
C.
D.
ABC
25%
5%
25%
3%
XYZ
25%
5%
5%
20%
17. Which of the following corporate officer position may be held by the same person?
A. President and Secretary
B. Treasurer and Secretary
C. President and Treasurer
D. None of the above
18. Mr. X, as the president of ABC Corporation, signed the check in his official capacity. Later on, the check
bounced due to insufficiency of funds and he is now being sued for violation of BP Blg. 22. Can Mr. X be
made personally liable?
A. Yes, because he acted in bad faith in allowing the issuance of a worthless check
B. No, because he merely signed in his official capacity
C. Yes, because he is made personally liable by law
D. No, because of the corporate entity theory
V. CLASSES OF SHARES OF STOCK
Shares of Stock designate the units into which the proprietary interest in a corporation is divided. They
represent the proportionate integers or units, the sum of which constitutes the capital stock of the corporation.
It is likewise the interest or right which the owner, called the stockholders or shareholder, has in the
management of the corporation, and in the surplus profits and in case of distribution, in all of its assets
remaining after the payment of its debts.
Certificate of Stock is a document or instrument evidencing the interest of a stockholder in the corporation.
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COMMON STOCKS are those which entitles its owner to an equal or pro-rata division of profits, if there are
any, but without any preference or advantage in that respect over any other stockholder or class of
stockholders.
Voting Rights: A common share usually carries with it the right to vote, and frequently, the exclusive right to do
so. The only time a common stock’s right to vote may be limited is where there exists Founders’ Shares.
FOUNDER’S SHARES: are shares issued to the founders of the corporation which are granted certain right
and privileges such as the exclusive right to vote and be voted for in the election of directors, for a period
not to exceed 5 years, subject to the approval of the SEC.
The period of 5 years is non-extendable because it may result in the almost perpetual disqualification of
other stockholders to elect or be elected as members of the BOD resulting to the lack of proper
representation thereat.
AMENDMENT: the amended Section removed the requirement of “approval of the SEC,” from where the start of
the five-year period shall commence.
On the other hand, a limitation was added “That such exclusive right shall not be allowed if its exercise will
violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law”; Republic Act No. 7042,
otherwise known as the “Foreign Investments Act of 1991”; and other pertinent laws.”
PREFERRED STOCKS is a stock that gives the holder preference over the holder of common stocks with
respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.
LIMITATIONS imposed by the Code in the issuance of preferred stocks:
1. They can be issued only with a stated par value; and
2. The preference must be stated in the AOI and in the certificate of stock otherwise each share shall be, in all
respect, equal to every other share.
Preference as to Dividends
They have the privilege of being paid dividends first before any other stockholders are paid theirs. The guaranty
is not absolute so as to create a relation of debtor and creditor between the corporation and the holders of such
stock. The amount of preference is stated in the contract of subscription and is usually a fixed percentage or by
specified amount indicated therein.
Participating and Non-Participating Preferred Shares
If the preferred share is participating, they are entitled to participate in dividends with the common
shareholders beyond their stated preference. Non-participating preferred shares on the other hand are entitled
to its fixed priority or preference only.
Cumulative and Non-cumulative Preference Shares
Cumulative preferred shares are those that entitle the owner thereof to payment not only of current dividends
but also back dividends not previously paid whether or not, during the past years, dividends were declared or
paid. In light of the provision of the Code stating that all shares are equal in all respects unless otherwise stated
in the AOI, a preferred share to be considered cumulative, the same must be provided for and specified in the
certificate.
Non-cumulative preferred shares are those which grant the holders of such shares only to the payment of
current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any
other stockholders are paid the same.
Voting Rights of Preferred Shares: same with redeemable shares, preferred shares are usually denied voting
rights – but this right must be clearly withheld. However, even if the right to vote is withheld, they shall have
the right to vote on the following:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;
AMENDMENTS: In determining whether the sale involved covers all or substantially all the properties and
assets of the corporation, the old Section 40 only provides “if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it was incorporated”.
Section 39, amending the above-mentioned provision now includes “The determination of whether or not the
sale involves all or substantially all of the corporation’s properties and assets must be computed based on its
net asset value, as shown in its latest financial statements.”
Also, the notice requirement can likewise now be sent through electronic means, if allowed by the by-laws or
done with the consent of the stockholders.
Amendment of by-laws: The submission of the amended by-laws no longer requires that it be filed with the
SEC attached to the original articles of incorporation and original bylaws.
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4.
5.
6.
7.
8.
Incurring, creating or increasing bonded indebtedness;
Increase or decrease of capital stock;
Merger or consolidation of the corporation with another corporation or other corporations;
Investment of corporate funds in another corporation or business in accordance with this Code; and
Dissolution of the corporation.
Preference upon liquidation: this preference must be stated in the contract to accordingly grant such
preference in the distribution of the assets ahead of the common stockholders, including dividends in arrears in
case the preferred shares are cumulative.
PAR AND NO-PAR VALUE SHARES
Par Value Shares are those whose values are fixed in the Articles and shown on the certificate. The par value is
the minimum subscription or original issue price of the shares. If the shares are issued at less than its par
value, the shares sold is considered as watered stocks, and the stockholders will remain liable for the difference
of the par value and the amount paid therefor.
No Par Value Shares are those whose issued price are not stated in the certificate of stock but may be fixed in
the AOI, or by the BOD when so authorized the articles or the by-laws, or in the absence thereof, the
stockholders themselves. They do not purport to represent any stated proportionate interest in the capital
measured by value, but only an aliquot part of the whole number of shares of the corporation issuing it.
The Code allows the issuance of no par value shares, subject to the following limitations provided in Sec. 6:
1. Such shares once issued, are deemed fully paid and thus, non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and
loans associations.
WATERED STOCKS: Watering of stocks happened when the shares are issued at less than its par or issue
price.
ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (1) 5M shares at P1.00 par value; and
(2) 1M no par value shares with issued value at P5.00. A acquired 1M of the par value shares for P.80 and
100,000 no par value shares at P4.00:
1. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the issuance or were passive about it,
without written dissent, are solidarily liable with A for the difference of P.20;
2. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because the no par value shares are
“deemed fully paid and non-assessable” (Sec. 6). Accordingly, only the directors or officers consenting to
the issuance are liable.
REDEEMABLE SHARES: are those subject to redemption, as indicated in the contract, usually attached to
preferred shares and other debt securities like bonds. This type of shares grants the corporation the right to
repurchase the shares at its option or at the option of the holder based on the face or issued value plus a
specified premium. The redemption may be optional or mandatory at a fixed future date.
The repurchase is not subject to the availability of unrestricted retained earnings.
TREASURY SHARES: are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means.
Subsequently, the corporation can re-issue the shares of stock or sell them or declare them as property
dividends.
Such shares, though paid for already, do not form part of outstanding shares and accordingly, do not have the
right to vote and receive dividends.
SUBSCRIPTION CONTRACT: Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription, notwithstanding the fact that the parties refer to
it as a purchase or some other contract.
Pre-incorporation subscriptions: refer to subscriptions for shares of stock of a corporation still to be formed
while post-incorporation subscriptions are those made or executed after the formation or organization of the
corporation, and are deemed irrevocable:
1. For a period of at least 6 months from the date of subscription unless (a) all the subscribers consent to the
revocation; or (b) the incorporation fails to materialize within said period or within a longer period as may
stipulated in the contract of subscription; and
2. After submission of the AOI to the SEC
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Issuance of certificates of stock; requisites:
1. It must be signed by the president or vice-president and countersigned by the secretary or assistant
secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any) should have been paid.
Indivisibility: Subscription to shares of stock are deemed indivisible and no certificate of stock can be issued
unless and until the full amount of his subscription including interest and expenses, if any is paid.
Rights of a SUBSCRIBER: a subscriber, even if not yet fully paid, is entitled to exercise all the rights of a
stockholder and the corresponding liability that attach thereunder, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right.
Delinquent Shares of Stock: a subscription to shares of stock become delinquent if there no payment made
on the balance of all or any portion of the subscription within 30 days on the date or dates fixed in the contract
of subscription without need of call, or on the date specified by the BOD pursuant to a call.
Effect of Delinquency:
General Rule: the stockholder thereof immediately loses the right to vote and be voted upon or represented
in any stockholders meeting as well as all the rights pertaining to a stockholder
Except: the right to receive dividends:
1. Cash dividend - shall first be applied to the unpaid balance on his subscription plus cost and expenses;
while
2. Stock dividends - shall be withheld until his unpaid subscription is paid in full.
Delinquent shares; enforcement of payment of subscriptions: Unpaid subscription or any percentage
thereof, together with interest if required by the by-laws or the contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a “call” declaring any or all unpaid
portion thereof to be so payable
To enforce payment, the following remedies are available:
1. By board action; and
2. By a collection case in court.
Failure or refusal of the BOD to enforce or collect payment of unpaid subscription will not prevent the creditors
or the receiver of the corporation to institute a court action to collect the unpaid portion thereof.
Delinquency Sale:
1. Amount to be paid includes:
a. The balance due on each subscription
b. All accrued interest
c. Costs of advertisement
d. Expenses of sale
2. Bids: shall all be for the amount due above and shall differ only on the number of shares that the bidders
are willing to accept in exchange of the said amount.
3. Highest Bidder: shall be the bid made for the least number of shares in exchange for the total amount due.
4. Effect of Delinquency Sale: The stock so purchased shall be transferred to such purchaser in the books of
the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any,
shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
5. No bidder: Should there be no bidder at the public auction, the corporation may bid for the same, and the
total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested in the corporation as treasury shares.
19. Which of the following is false with regards preferred shares?
A. Preferred share is a stock that gives the holder preference over the holder of common stocks with
respect to the payment of dividends and/or with respect to distribution of capital upon liquidation.
B. A preferred share can be issued without a par value provided it is not issued for less than P5.
C. The preference must be stated in the Articles of Incorporation and the Certificate of Stock.
D. None of the above.
20. As a general rule, preferred shares do not give the holder the right to vote. However, they shall have the
right to vote on the following, except:
A. Amendment of the Articles of Incorporation
B. Adoption and amendment of the by-laws
C. Sale of all or substantially all of the inventories
D. Increase or decrease of capital stock
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21. X Co. has P10M Authorized Capital Stock divided into: (1) 5M shares at P1.00 par value; and (2) 1M no par
value shares with issued value at P5.00. If A acquired 100,000 no par value shares at P4.00 and the same
were issued. In this case,
A. There is no issuance of watered stocks
B. A and the directors of X Co. are solidarily liable for the P1.00 per share difference.
C. Only A is liable for the P1.00 per share difference.
D. Only the directors of X Co. is liable for the P1.00 per share difference
22. Mr. A subscribed to 10,000 shares of P1 par value for P10 per share. He was able to pay 50% of the
subscription price. In this case, which of the following is not a right granted to Mr. A:
A. He can receive dividends attributable to the whole 10,000 shares
B. He has the right to vote equivalent to the 10,000 shares
C. He can demand the issuance of certificate of stock for the 5,000 shares already paid
D. None of the choices.
VI. RIGHTS OF A STOCKHOLDER
1. Participation in the management of the corporate affairs by exercising their right to vote and be voted
upon either personally or by proxy;
Instances where the concurrence of the stockholders are necessary for the exercise of the
powers of the corporations
a. Requiring majority vote of the BOD and concurrence of the stockholders representing 2/3 of the
outstanding capital stock:
i. Increase/decrease corporate stock
ii. Incur or create bonded indebtedness;
iii. Sell, dispose, lease, encumber all or substantially all of corporate assets;
iv. Invest in another corporation other than the primary purpose;
v. Amend the articles of incorporation.
vi. Merger or consolidation
vii. Voluntary dissolution of the corporation
AMENDMENT: Voluntary dissolution now requires a majority vote only of the stockholders for
instances with NO creditors affected. For voluntary dissolutions where creditors are affected, the
voting requirement remains to be 2/3.
viii.
ix.
x.
xi.
Extend or shorten the corporate term;
Deny pre-emptive right
Declare stock dividends
Enter into a management contract - where a stockholder(s) own 1/3 of the capital stock of the
managing corporation or where a majority of the members of the board of the managing
corporation also constitute a majority of the board of the managed corporation;
AMENDMENT: Section 43 of the RCC now limits the term for a management contract to 5 years for
any 1 term.
b. Majority of the BOD + majority of the outstanding capital:
i. Enter into a management contract other than above;
ii. Adopt, amend or repeal the by-laws
c. Without board resolution, 2/3 of the stockholders may:
i. Delegate to the board the power to amend the by-laws
ii. Remove a member of the Board of Directors – vote required
iii. Ratify a business opportunity entered into by a member of the Board (corporate opportunity
doctrine)
iv. Ratification of contracts of self-dealing directors, where his presence is required to constitute a
quorum and/or his vote is required for its approval by the BOD.
d. Without board resolution, majority of the stockholders may:
i. Revoke delegated power to amend by-laws
ii. Calling a special meeting to remove directors
iii. To fix compensation of directors
iv. To fix the issue price or stated value of no-par value shares.
2. To enter into a voting trust agreement;
3. To receive DIVIDENDS and to compel their declaration if warranted;
If the dividends to be declared are stock dividends, it requires not only the majority vote of the BOD but also
the approval of stockholders owning at least 2/3 of the outstanding capital stock.
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The BOD can be compelled to declare dividends if the retained earnings are in excess of 100% of the paid-up
capital. However, the BOD can still refuse, if:
a. Justified by a definite corporate expansion/projects/programs approved by the Board;
b. The corporation is prohibited under a loan agreement to declare dividends without the creditor’s consent
and such consent has not yet been secured;
c. It can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation.
If there are no retained earnings, dividends, as a rule, cannot be declared out of capital stock. EXCEPT:
a. Liquidating dividends
b. Investments in wasting assets such as mining, oil, well, etc.
4. To transfer shares of stock subject only to reasonable restrictions such as the options and preferences as
may be allowed by law inclusive of the right of the transferee to compel the registration of the transfer in the
books of the corporation;
5. To be issued a certificate of stock for fully paid-up shares;
6. To exercise pre-emptive rights;
A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares of any class in
proportion to his present holdings, the purpose being to enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in the surplus. Except in the following cases:
a. Shares to be issued to comply with the laws requiring stock offering or minimum stock ownership by the
public;
b. Shares issued in good faith in exchange for property needed for corporate purposes;
c. Shares issued in payment for previously contracted debt;
d. In case the right is denied in the Articles of Incorporation;
If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to
purchase the corresponding shares of the shareholder who declined. But if nobody purchased the same and
later on the board re-issued the shares, the pre-emptive right applies.
7. To exercise their appraisal right;
APPRAISAL RIGHT: Right is the method of paying a shareholder for the taking of his property. It is a
statutory means whereby a stockholder can avoid the conversion of this property into another property not
of his own choosing.
When may it be exercised:
a. In case any amendment to the articles of incorporation has the effect of changing or restricting the
rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of corporate existence;
Not all amendments: the right may only be exercised in cases of amendment which “has the effect of
changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or shortening the term
of corporate existence”.
Accordingly, if the amendment is to increase or decrease the number of directors, or change the
corporate name, or change of principal office, the appraisal right is not available.
b.
c.
d.
e.
In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all
of the corporate property and assets as provided in the Code;
In case of merger or consolidation;
Investment of funds in another corporation or business or for any other purpose other than its primary
purpose;
In a close corporation, a stockholder has the unbridled right to compel the corporation “for any reason”
to purchase his shares at their fair value which shall not be less than the par or issued value, when the
corporation has sufficient assets to cover its debts and liabilities, exclusive of capital stock.
Suspension of rights: the stockholder concerned is regarded as having made an election to withdraw from
the corporate enterprise and take the value of his stock. Such a procedure suspends (for a maximum period
of 30 days) certain ownership rights associated with stockholder status, such as the right to receive
dividends or distribution and the right to vote which cannot be restored without compliance with the
governing statutory conditions.
8.
9.
10.
11.
To
To
To
To
institute and file a derivative suit;
recover shares of stock unlawfully sold for delinquency;
inspect the books of the corporation;
be furnished by the most recent financial statement of the corporation;
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AMENDMENT: Changes introduced by Section 74 (formerly Section 75) concerning the issuance of the
corporation’s financial statements are as follows:
Certification
Alternative
Certification
12.
13.
14.
15.
16.
Section 75 (old)
Independent CPA
Section 74 (RCC)
In accordance with the Code and the rules
the SEC may prescribe
If paid-up capital is less than P50,000, the
FS may be certified under oath by the
Treasurer or any responsible officer of the
corporation
If the total assets or total liabilities of the
corporation is less than P600,000, or such
other amount as may be determined
appropriate by the DoF, the financial
statements may be certified under oath by
the treasurer and the president.
To be issued a new stock certificate in lieu of the lost or destroyed one;
To have the corporation dissolved;
To participate in the distribution of assets of the corporation upon dissolution;
In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock; and
Also, in the case of a close corporation, to withdraw therefrom, for any reason, and compel the
corporation to purchase his shares.
23. Which of the following grounds to deny pre-emptive right requires the approval of 2/3 of the outstanding
capital stock?
A. Shares to be issued in order to comply with the laws requiring stock offering or minimum stock
ownership by the public
B. Shares issued in good faith in exchange for property needed for corporate purposes
C. In case the right is denied in the By-Laws
D. None of the choice
24. The appraisal right of a stockholder may be exercised in the following actions of the corporation, except:
A. In case of merger or consolidation.
B. Sale of all or substantially all the assets of the corporation.
C. Investment of funds in another corporation or business or for any other purpose other than the primary
purpose.
D. Amendments to the Articles of Incorporation to change the name of the corporation
25. Under the revised corporation code, which of the following is a valid requirement for the validity of the
annual stockholders’ meeting?
A. If there is no date fixed in the by-laws, it can be held on any date in April
B. There must be notice 2 weeks prior to the meeting
C. It must be held in the city where the principal office is located
D. It must be called by the proper party
VII.
BY-LAWS
BY-LAWS are rules made by a corporation for its own government; to regulate the conduct and define the
duties of the stockholders or members towards the corporation and among themselves. They are the rules and
regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs
and concerns and its stockholder or members and directors and officers with relation thereto and among
themselves in their relation to it.
Effectivity: After approval by the SEC.
Adoption of by-laws: may be made:
1. Prior to incorporation – it must be signed by all the incorporators without need of the majority vote of
outstanding stocks or members as long as it is submitted together with the AOI;
2. After incorporation – must be submitted within 1 month after receipt of the notice of issuance of certificate
of registration or incorporation and must be approved by majority of the outstanding capital stock or
members. Failure to file within the 1 month period may be a ground for suspension or revocation of the
corporate franchise.
AMENDMENT: Section 45 (amending Section 46) of the RCC removed the one-month (from receipt of the
notice of issuance of the certificate of incorporation) requirement to submit the by-laws.
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Amendment of by-laws; two modes:
1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or
members, at a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning 2/3 of the outstanding capital stock
or 2/3 of the members. This power, however, is considered revoked, when so voted by a majority of the
outstanding capital stock or members in a regular or special meeting.
AMENDMENTS: Section 46(d) of the RCC now includes “The modes by which a stockholder, member, director,
or trustee may attend meetings and cast their vote.”
It likewise includes that an arbitration agreement may be provided in the bylaws.
The submission of the amended by-laws no longer requires that it be filed with the SEC attached to the original
articles of incorporation and original bylaws.
VIII.
Quorum
Date of Regular
Meeting
Date of Special
Meeting
Notice
Place
MEETINGS
DIRECTORS
Majority
Monthly as fixed in the by-laws
Regular/Special Meetings – 1 day prior to the
meeting.
AMENDMENT: 2 days prior to the meeting.
Anywhere
STOCKHOLDERS
Majority of the Outstanding Capital Stock
Annual as fixed in the by-laws. If no such
date is fixed, any date in April as the BOD/T
may determine.
AMENDMENT: Any date after April 15.
At any time deemed necessary or as provided
for in the by-laws
Regular Meetings – 2 weeks (now 21 days)
Special Meetings – 1 week
City or Municipality where the principal office
is located. For this purpose, Metro Manila
shall be considered as one city.
AMENDMENT: the meeting shall not be at the
principal office itself, unless it is not
practicable, in the city or municipality where
the principal office is located.
Proxy Voting
Voting
Requirement
Not allowed for a director or trustee, since he
was supposedly elected because of his
personal qualifications and thus must
personally attend and vote on matters
brought before the meeting.
General Rule: Majority of those present shall
be valid as a corporate act.
Moreover, Metro Cebu and Metro Davao, as
well as other Metropolitan Areas are now
considered a city or municipality.
Generally allowed
Refer to voting requirements under Rights of
Stockholders
Exceptions:
a. Election of corporate officers: majority of
all the members of the board.
b. When the by-laws provide for higher
voting requirement.
Validity of Stockholders’ Meetings despite defect: If the voting requirement is met, any resolution passed in the
meeting, even if improperly held or called will be valid if ALL the stockholders or members are present or duly
represented thereat, as provided under the last paragraph of Sec. 51: “All proceedings had and any business
transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting.”
AMENDMENT: The meeting is still considered valid even if improperly held as long as ALL the stockholders or
members are present or duly represented, EXCEPT if the purpose of their attendance is only object to the
transaction of any business because the meeting is not lawfully called or convened.
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OTHER AMENDMENTS TO STOCKHOLDERS’ MEETINGS:
1. Notice of meetings can now be sent through electronic means and shall be accompanied by:
a. The agenda for the meeting
b. A proxy form which shall be submitted to the corporate secretary within a reasonable time prior to the
meeting
c. When attendance, participation, and voting are allowed by remote communication or in absentia, the
requirements and procedures to be followed when a stockholder or member elects either option; and
d. When the meeting is for the election of directors or trustees, the requirements and procedure for
nomination and election
2. Unless the bylaws provide for a longer period, the stock and transfer book or membership book shall
be closed at least 20 days for regular meetings and 7 days for special meetings before the scheduled
date of the meeting.
3. Postponement can be validly made if there is a notice of at least 2 weeks prior to the meeting.
4. The revised provision likewise authorizes the voting in absentia or through remote communication.
5. A director, trustee, stockholder, or member may propose any other matter for inclusion in the agenda at any
regular or special meeting.
6. In the stockholders’ meeting for the election of directors/trustees, Section 23 of the RCC now specifically
allows the stockholders or members to vote through remote communication or in absentia, in case the
by-laws or majority of the BOD authorizes the same, or even without such authorization in case of
corporations vested with public interest.
A stockholder or member who participates through remote communication or in absentia, shall be deemed
present for purposes of quorum.
Notice: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
However, under the revised Section 49 of the RCC, general waivers of notice in the articles of
incorporation or the bylaws shall not be allowed.
The attendance at a meeting shall constitute a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting to the transaction of any business because the meeting
is not lawfully called or convened.
OTHER AMENDMENTS TO DIRECTORS’ MEETINGS: The following are the changes introduced by Section 52
(formerly Section 53) of the RCC:
1.
Directors/trustees are now allowed to attend the meeting through remote communication such as
videoconferencing, teleconferencing, or other alternative modes of communication that allow them
reasonable opportunities to participate. Directors or trustees cannot attend or vote by proxy at board
meetings.
2.
A director or trustee who has a potential interest in any related party transaction must recuse from
voting on the approval of the related party transaction without prejudice to compliance with the
requirements for Self-Dealing Directors.
IX. REORGANIZATION; MERGER AND CONSOLIDATION
REORGANIZATION: is generally entered into to put the company upon a sound financial basis and to enable it
to take care of its obligations thereby avoiding liquidation or bankruptcy. But in some cases, a reorganization is
effected notwithstanding the fact that the corporation is solvent.
MERGER: is a union effected by absorbing one or more existing corporations by another which survives and
continues the combined business. It is the uniting of two or more corporations by the transfer of property to
one of them which continue in existence, the other or the others being dissolved and merged therein.
CONSOLIDATION: is the uniting or amalgamation of two or more existing corporations to form a new
corporation. It signifies a union as necessarily results in the creation of a new corporation and the termination
of existence of old ones. The united concern resulting from such union is called consolidated corporation.
In effect, in a consolidation, the constituent corporations are all dissolved, while in a merger, the absorbing or
surviving corporation is not, only the absorbed.
REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION:
1. The BOD/T of each constituent corporations shall approve a plan or merger or consolidation setting for the
matters required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3 of the member in
non-stock corporations of each of such corporations at separate corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be given
to all stockholders or members in the same manner as in regular/special meetings of stockholders
(AMENDMENT from 2 weeks, either personally or by registered mail stating the purpose thereof);
4. Execution of the articles of merger or consolidation by each constituent corporations to be signed by the
president or vice-president and certified by the corporate secretary or assistant secretary setting forth the
matters required in Sec. 78;
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5. Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the requirement
of Sec. 79 that if it involve corporations under direct supervision of any other government agency or
governed by special laws the favorable recommendation of the government agency concerned shall first be
secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger or consolidation
shall be effective. If the plan, however, is believed to be contrary to law, the SEC shall set a hearing to give
the corporations concerned an opportunity to be heard upon notice and thereafter, the Commission shall
proceed as provided in the Code.
EFFECTS OF MERGER OR CONSOLIDATION:
1. There will only be a single corporation. In case of merger, the surviving corporation or the consolidate
corporation in case of consolidation;
2. The termination of corporate existence of the constituent corporations, except that of the surviving
corporation or the consolidated corporation;
3. The surviving corporation or the consolidated corporation will possess all the rights, privileges, immunities
and powers and shall be subject to all the duties and liabilities of a corporation organized under the Code;
4. The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises
of the constituent corporations, and all property and all receivables due, including subscriptions to shares
and other choses in action, and every other interest of, or belonging to or due to the constituent
corporations shall be deemed transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5. The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by
the merger or consolidation.
6. There would be no need to liquidate or wind-up the affairs of the corporation because (1) there are no
assets to distribute; (2) no debts and liabilities to pay – since all these are transferred to the surviving or
consolidated corporation.
AMENDMENTS: The contents of the Articles of Merger or Consolidation now includes:
1.
The carrying amounts and fair values of the assets and liabilities of the respective companies as of the
agreed cut-off date;
2.
The method to be used in the merger or consolidation of accounts of the companies;
3.
The provisional or pro-forma values, as merged or consolidated, using the accounting method; and
4.
Such other information as may be prescribed by the SEC.
Section 78 (amending Section 79) now removed the requirement that the Articles of Merger/Consolidation must
be submitted in quadruplicate.
26. The delegation of the power to amend the by-laws would require __ vote of the stockholders, while its
revocation would require __ vote.
A. Majority; Majority
B. Majority; 2/3
C. 2/3; 2/3
D. 2/3; Majority
27. A Corp. and B Corp. agreed to a business combination. In the agreement, A. Corp. will absorb all the assets
and liabilities of B Corp. and the latter will cease to exist. The business combination entered into is a:
A. Merger
C. Reorganization
B. Consolidation D. Quasi-reorganization
28. The merger or consolidation is deemed effective starting:
A. On the date the parties agreed to a consolidation or merger
B. On the date the stockholders ratified the Board resolution for consolidation or merger
C. Upon submission of the articles of merger or consolidation to the SEC
D. Upon issuance of the certificate of merger or consolidation
29. As a general rule, ____ of the outstanding capital stock is required to constitute a quorum; and majority of
_____________ is the voting requirement.
A. Majority; outstanding capital stock
B. Majority; those present
C. 2/3; outstanding capital stock
D. 2/3; those present
30. The regular meetings of _____ are to be held monthly:
A. Stockholders
B. Members
C. Board of Directors
D. All of the choices
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X. NON-STOCK CORPORATIONS
A non-stock corporation is one where no part of its income is distributable as dividends to its members,
trustees, or officers, except upon dissolution. Any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations,
except as may be covered by specific provisions pertaining to non-stock corporations.
Differences:
Purpose
STOCK CORPORATION
Generally, for profit
Distribution
of
dividend
Term of office of the
directors/trustees
Authorized
Voting
Manner of voting
Cumulative
Either in person or by proxy
Transferability
of
interest
Ownership of director
Place of meeting of
stockholders/members
1 year until their successor is
elected and qualified
Transferable
At least one share
City or municipality where the
principal office is located (now
Principal Office unless not
practicable)
NON-STOCK CORPORATION
Primarily organized for charitable, religious, educational,
professional, cultural, scientific, social, civic service, or
similar purposes, like trade, industry, agricultural and like
chambers or any combination thereof
Not authorized
1/3 of the number of directors shall expire every year; and
subsequent elections of trustees comprising 1/3 shall be
held annually and trustees so elected shall have a term of 3
years
The RCC removed the staggered term requirement
Straight voting unless authorized under the by-laws or AOI
By mail or other similar means as may be authorized by
the by-laws
AMENDMENT: Section 88 of the RCC (amending Section
89) removed the paragraph on voting by mail or other
similar means by members and now specifies that “[t]he
bylaws may xxx authorize voting through remote
communication and/or in absentia.”
Membership is personal and non-transferable, unless the
AOI or by-laws provide otherwise
Member
AMENDMENT: independent trustees are not required to
be a member
Any place in the Philippines
XI. CLOSE CORPORATIONS
DEFINITION: A close corporation is one whose articles of incorporation provide that:
1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not
more than a specified number of persons, not exceeding twenty (20);
2. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted
by this Title; and
3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any
class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds
(2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.
Business with public interest: may not be formed as close corporation. Sec. 140 of the Code lays down a similar
policy authorizing NEDA to recommend to the legislature the setting of maximum limits to family or group
ownership of stock in corporations vested with public interest, and the determination of whether or not it should
be vested with public interest within its domain. The following cannot be a close corporation:
1. Mining companies;
2. Oil companies;
3. Stock exchanges;
4. Banks;
5. Insurance companies;
6. Public utility;
7. Educational institutions
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Differences with an Ordinary Stock Corporation:
CLOSE CORPORATION
The number of stockholders cannot exceed 20
Shares of stock are subject to specified restrictions
Shares of stock are prohibited from being listed in the stock
exchange or offered for sale to the public
Stockholders may take an active part in corporate
management by vesting management to them rather than a
Board of Director
To the extent that all stockholders can be deemed directors,
the number of directors can effectively be more than 15
To the extent that directors may be classified into one or
more classes and to be voted solely by a particular class of
stock, cumulative voting may, in effect, be restricted
The articles of incorporation may provide that all officers shall
be elected or appointed by the stockholders
Restriction on transfer of shares should be indicated in the
articles of incorporation, by-laws and stock certificates
Pre-emptive right of stockholders is broader as it includes all
issues without exception
Appraisal right may be exercised for any reason with the
limitation only that the corporation has sufficient assets to
cover its liabilities exclusive of capital stock
XII.
ORDINARY STOCK CORPORATION
No limitation as to number of shareholder
Generally no restriction on transfer of shares
No prohibition
Management
Directors
is
lodged
in
the
Board
of
and
no
Maximum number of directors is 15
Ordinarily, no such classification
restrictions on cumulative voting
Officers are elected by the Board of Directors
Valid and binding if indicated in the articles of
incorporation and stock certificates
Pre-emptive rights may be denied as provided
for in section 39
Appraisal right may be exercised only on
specific grounds
ONE PERSON CORPORATION:
A One Person Corporation is one formed by a natural person, a trust or an estate, who is the sole stockholder
thereof. The provision of the new Chapter III of the Revised Corporation Code shall apply to an OPC and other
provisions of the Code shall apply suppletorily (Section 115);
Corporate Name: must contain the words “OPC”.
Not Applicable to OPC:
1. Authorized Capital Stock
2. By-Laws
3. Minutes of the Meetings of the Board of Directors (in lieu of which shall be the resolutions recorded in a
Minutes Book)
Not allowed to incorporate as an OPC:
1. Banks, quasi-banks, pre-need, trust, insurance companies
2. Public and publicly-listed companies
3. Non-chartered GOCCs
4. Natural persons for the purpose of exercising their profession.
Articles of Incorporation: shall be the same as an ordinary corporation with the following additional provisions:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee,
administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties
together with the proof of such authority to act on behalf of the trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation
of the authority.
Corporate Officers: The sole stockholder shall automatically be the sole director and the President. Within 15
days from the issuance of its certificate of incorporation, an OPC shall appoint a treasurer, corporate secretary,
and other officers as it may deem necessary, and notify the SEC thereof within 5 days from appointment.
Other positions of the president/sole stockholder:
1. Corporate Secretary: not allowed
Corporate Secretary: In addition to the functions designated by the OPC, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the single stockholder, which
notice shall be given no later than 5 days from such occurrence;
c. Notify the SEC of the death of the single stockholder within 5 days from such occurrence and stating in
such notice the names, residence addresses, and contact details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the legal heirs
with regard to, among others, the election of a new director, amendment of the articles of
incorporation, and other ancillary and/or consequential matters.
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2. Treasurer: allowed provided ge shall give a bond to the SEC in such a sum as may be required and a
written undertaking to faithfully administer the OPC’s funds to be received as treasurer, and to disburse and
invest the same according to the Articles as approved by the SEC.
Nominee and Alternate Nominee: The single stockholder shall designate a nominee and an alternate nominee
who shall, in the event of the single stockholder’s death or incapacity, take the place of the single
stockholder as director and shall manage the corporation’s affairs.
The articles of incorporation shall state the names, residence addresses and contact details of the nominee and
alternate nominee, as well as the extent and limitations of their authority in managing the affairs of the OPC.
The written consent of the nominee and alternate nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in writing any time before the death or incapacity of the single
stockholder
Term of the Nominee: When the incapacity of the single stockholder is temporary, the nominee shall sit as
director and manage the affairs of the OPC until the stockholder, by self-determination, regains the capacity to
assume such duties.
In case of death or permanent incapacity of the single stockholder, the nominee shall sit as director and
manage the affairs of the OPC until the legal heirs of the single stockholder have been lawfully determined,
and the heirs have designated one of them or have agreed that the estate shall be the single stockholder of the
OPC.
The alternate nominee shall sit as director and manage the OPC in case of the nominee’s inability, incapacity,
death, or refusal to discharge the functions as director and manager of the corporation, and only for the same
term and under the same conditions applicable to the nominee.
Change of Nominee: The single stockholder may, at any time, change its nominee and alternate nominee by
submitting to the SEC the names of the new nominees and their corresponding written consent. For this
purpose, the articles of incorporation need not be amended.
Liability of Single Stockholder: A sole shareholder claiming limited liability has the burden of affirmatively
showing that the corporation was adequately financed.
Where the single stockholder cannot prove that the property of the OPC is independent of the stockholder’s
personal property, the stockholder shall be jointly and severally liable for the debts and other liabilities of the
OPC.
The principles of piercing the corporate veil applies with equal force to OPC as with other corporations.
Conversion from Ordinary Corporation to OPC: When a single stockholder acquires all the stocks of an
ordinary stock corporation, the latter may apply for conversion into n OPC, subject to the submission of such
documents as the SEC may require.
If the application for conversion is approved, the Commission shall issue certificate of filing of amended articles
of incorporation reflecting the conversion. The OPC converted from an ordinary stock corporation shall succeed
the latter and be legally responsible for all the latter’s outstanding liabilities as of the date of conversion.
Conversion from OPC to Ordinary Corporation: An OPC may be converted into an ordinary stock corporation
after due notice to the SEC (within 60 days from occurrence) of such fact and of the circumstances leading to
the conversion, and after compliance with all other requirements for stock corporations under the RCC. If all
requirements have been complied with, the Commission shall issue an amended certificate of incorporation
reflecting the conversion.
In case of death of the single stockholder, the nominee or alternate nominee shall transfer the shares to the
duly designated legal heir or estate within 7 days from receipt of either an affidavit of heirship or selfadjudication executed by a sole heir, or any other legal document declaring the legal heirs of the single
stockholder and notify the SEC of the transfer. Within 60 days from the transfer of the shares, the legal heirs
shall notify the SEC of their decision to either wind up and dissolve the OPC or convert it into an ordinary stock
corporation.
The ordinary stock corporation converted from an OPC shall succeed the latter and be legally responsible for all
the latter’s outstanding liabilities as of the date of conversion.
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XIII.
FOREIGN CORPORATIONS
A FOREIGN CORPORATION is one formed, organized or existing under any laws other than those of the
Philippines.
Incorporation Test: is applied in determining whether a corporation is domestic or foreign. If it is incorporated in
another state, it is a foreign corporation, while if it is registered under Philippine laws, it is deemed a Filipino or
domestic corporation irrespective of the nationality of its stockholders.
Control Test: on the other hand, is used to determine corporate nationality for purposes of applying laws, e.g.,
prohibition to acquire lands applicable to corporations more than 40% of which is owned by non-Filipinos.
Grandfather Rule: a method of determining the nationality of a corporation which in turn is owned by
another corporation by breaking down the entity structure of the shareholders of the corporation. The true
Filipino ownership is traced all the way to the individual stockholders of the corporation (A) owning shares in
another corporation (B), by multiplying the Filipino ownership of the first corporation (A) to the corresponding
ownership of the other corporation (B).
It applies to nationalized activities or those which require whole or partial Filipino ownership.
RESIDENT AGENT: As a condition precedent to the grant of license to do or transact business in the
Philippines, the foreign corporation is required to designate its resident agent on whom summons and other
legal processes may be served in all actions or legal proceedings against such corporation.
AMENDMENT: A resident agent corporation for a foreign corporation is now required that it is of sound
financial standing and must show proof that it is in good standing as certified by the SEC.
LICENSE REQUIREMENT AND DOING BUSINESS WITHOUT ONE: A foreign corporation must secure the
necessary license before it can transact or do business in the Philippines.
Without a license: a foreign corporation shall NOT be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.
What constitutes “doing business”: Doing business in the Philippines may be determined using the following
tests:
1. Continuity test – doing business implies a continuity of commercial dealings and arrangements and
contemplates to some extent the performance of acts or works or the exercise of some functions normally
incident to and in progressive prosecution of the purpose and object of its organization;
2. Substance test – a foreign corporation is doing business in the country if it is continuing the body or
substance of the enterprise of business for which it was organized
3. Contract test – actual performance of specific commercial acts within the territory of the Philippines
“DOING BUSINESS” under the Foreign Investment Act (Sec. 3, d), “doing business” would include:
1. Soliciting orders, service contracts;
2. Opening offices, whether called “liaison offices” or branches;
3. Appointing representatives or distributor domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling 180 days or more;
4. Participating in the management, supervision or control of any domestic business, firm, entity or corporation
in the Philippines;
5. Any other act that imply a continuity of commercial dealings or arrangements and contemplate to that
extent the performance of acts or works, or the exercise of functions normally incident to and in progressive
prosecution of commercial gain or of the purpose and object of the business organization.
Provided, however, that the phrase “doing business” shall not be deemed to include:
1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do
business, and/or exercise of rights as such investor, nor
2. Having a nominee director or officer to represent its interest in such corporation; nor
3. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own
name and for its own account.
31. The following does not apply to an OPC, except:
A. Articles of Incorporation
B. By-Laws
C. Authorized Capital Stock
D. Minutes of the Meetings of BOD
32. What will be the term of the nominee in case of temporary incapacity of the sole stockholder?
A. Until declaration of the court of the sole stockholder’s capacity to take over
B. Upon self-determination of the sole stockholder that he regained capacity
C. Until the legal heirs of the stockholder has been determined
D. Once the heirs have designated one of them to take over management
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33. The place of meetings of members in a non-stock corporation:
A. Anywhere
B. Anywhere in the Philippines
C. The principal office
D. The city or municipality where the principal office is located
34. In order to be considered as a close corporation, the following are required to appear in the Articles of
Incorporation, except:
A. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not exceeding twenty.
B. All the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title.
C. The corporation shall not list in any stock exchange or make any public offering of any of its stock of
any class.
D. None of the choices is an exception.
35. Which of the following business is allowed to incorporate as a close corporation?
A. Banks and insurance companies
B. Mining companies
C. Educational institutions
D. Hospitals
36. To qualify as a foreign corporation, the consideration is
A. Ownership of the shares of stock
B. Appointment of a resident agent
C. Agreement of the parties
D. Under what country’s law it was incorporated
37. A corporation doing business in the Philippines without the requisite license:
A. Can sue and be sued in Philippine courts
B. Can sue but cannot be sued in Philippine courts
C. Can be sued but cannot sue in Philippine courts
D. Cannot sue and be sued in Philippine courts
XIV.
DISSOLUTION AND LIQUIDATION
DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate existence.
When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the business for
which it was incorporated. It will nevertheless continue as a body corporate for another period of three years
from the time it is dissolved but only for the purpose of winding up its affairs and the liquidation of its assets.
THREE WAYS OF DISSOLUTION:
1. Expiration of its corporate term
Extension: should be made before the expiration of the original term, but not earlier than 5 years prior to
such expiration, otherwise the corporation is dissolved, ipso facto.
Dissolution by shortening the term of corporate existence: A corporation may exist for 50 years, but there is
no law which prevents the shareholders thereof to shorten that period and effect a dissolution of the
corporation. This, however, requires the vote of the stockholders to be cast in a meeting therefor, not only
“written assent” as for general amendments. Moreover, this requires the approval of the SEC and its
inaction is not deemed an approval therefor.
2. Voluntary surrender of its primary franchise (voluntary dissolution); and
Formal and Procedural Requirements when no creditors are affected.
a. Majority vote of the board of directors or trustees;
b. Sending of notice of each stockholders or member either by registered mail or personal delivery at least
thirty (30) days prior (now 20 days) to the meeting (scheduled by the board for the purpose of
submitting the board action to dissolve the corporation for approval of the stockholder or members.);
c. Publication of the notice of time, place and subject of the meeting for three (3) consecutive weeks (now
once) in a newspaper published in the place where the principal office of said corporation is located or
in a newspaper of general circulation in the Philippines;
d. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members (now majority) at the meeting duly called for the purpose;
e. A copy of the resolution authorizing the dissolution must be certified by a majority of the board of
directors or trustees and countersigned by the corporate secretary (now A verified request for
dissolution shall be filed with the SEC stating: (a) the reason for the dissolution; (b) the form,
manner, and time when the notices were given; (c) names of the stockholders and directors or
members and trustees, who approved the dissolution; (d) the date, place, and time of the meeting in
which the vote was made; and (e) details of publication.)
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f.
Withdrawal:
i. A withdrawal of the request for dissolution shall be made in writing, duly verified by any
incorporator, director, trustee, shareholder, or member and signed by the same number of
incorporators, directors, trustees, shareholders, or members necessary to request for dissolution.
ii. The withdrawal shall be submitted no later than fifteen (15) days from receipt by the SEC of the
request for dissolution.
iii. Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action on the request
for dissolution and shall, after investigation: (a) make a pronouncement that the request for
dissolution is deemed withdrawn; (b) direct a joint meeting of the board of directors or trustees and
the stockholders or members for the purpose of ascertaining whether to proceed with dissolution; or
(c) issue such other orders as it may deem appropriate.
Issuance of a certificate of dissolution by the SEC.
Where creditors are affected, the voting requirement remains to be 2/3 of the stockholders and what is filed
with the SEC is a petition not a request.
3. The revocation of its corporate franchise (involuntary dissolution)
Grounds:
a. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;
b. Refusal to comply or defiance of any lawful order of the Commission restraining commission of
acts which would amount to a grave violation of its franchise;
c. Continuous inoperation for a period of at least five (5) years;
Continuous inoperation: If a corporation has commenced its business but subsequently becomes
inoperative continuously for a period of at least 5 years, the same shall be merely a ground
for suspension or revocation of its corporate franchise or certificate of registration.
AMENDMENTS: In case of continuous non-operation for 5 years, it is no longer considered a ground for
revocation, at least not immediately. In such case, the SEC may, after due hearing and notice, place the
corporation under delinquent status and allow the corporation to resume operations within 2 years upon
compliance with the requirements of the SEC; where upon compliance, the SEC shall issue an order lifting
the delinquent status.
In case of non-compliance, with the requirements and to resume operations, only then will the SEC cause
the revocation of the corporation’s certificate of incorporation.
Notably, the Section 21 no longer includes the exception that the provision on failure to commence and
continuous non-operation shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond the
control of the corporation as may be determined by the SEC.
COMMENCEMENT OF BUSINESS: Once the certificate of incorporation has been issued, the
corporation MUST formally organize and commence its business.
Non-Use of Corporation Charter: the failure of the corporation to organize within 2 years would
result in it automatic dissolution, unless, of course, its failure to do so is due to causes beyond its
control.
AMENDMENT: The period for the automatic revocation of the corporate charter has been increase from 2
to 5 years in case of failure to organize.
Formal Organization: refers to the process of structuring the corporation to enable it to effectively
pursue the purpose for which it was organized.
d.
e.
Failure to file by-laws within the required period;
Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period.
Other grounds provided under the Corporation Code:
a. Violation of any provision of the Code under section 144;
b. In case of deadlock in a close corporation as provided for in section 105;
c. In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal
or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or
whenever corporate assets are being misapplied or wasted under section 105.
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AMENDMENTS: Aside from empowering the SEC to motu proprio dissolve a corporation, the following
grounds are now specified under Section 138:
1.
Non-use of corporate charter
2.
Continuous inoperation of a corporation
3.
Upon receipt of a lawful court order dissolving the corporation
4.
Upon finding by final judgment that the corporation procured its incorporation through fraud
5.
Upon finding by final judgment that the corporation:
a. Was created for the purpose of committing, concealing or aiding the commission of securities
violations, smuggling, tax evasion, money laundering, or graft and corrupt practices;
b. Committed or aided in the commission of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its stockholders knew; and
c. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other
fraudulent or illegal acts by its directors, trustees, officers, or employees.
If the corporation is ordered dissolved by final judgment pursuant to the above grounds (a), (b) and
(c) under no. 5, its assets, after payment of its liabilities, shall, upon petition of the SEC with the
appropriate court, be forfeited in favor of the national government. Such forfeiture shall be without
prejudice to the rights of innocent stockholders and employees for services rendered, and to the
application of other penalty or sanction under the RCC or other laws
EFFECTS OF DISSOLUTION: Dissolution terminates its power to enter into contracts or to continue the
business as a going concern.
The SC held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which it
was organized. It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a
grant (Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a contract executed prior to its
dissolution for the purpose of continuing the business of its organization (Cebu Ports vs. State Marine).
Debts due to or by a corporation are not extinguished. It has thus been held that the termination of the life of a
juridical entity does not, by itself, imply the diminution or extinction of rights demandable against such juridical
entity (Gonzales vs. Sugar Regulatory Adm.)
Despite its dissolution, a corporation nonetheless, continues to be a body corporate for a period of 3 years for
purposes of liquidation and winding up its affairs (Sec. 122). Upon expiration of the 3-year period to wind up its
affairs, the juridical personality of the corporation ceases for all intent and purposes, and as a general rule, it
can no longer sue and be sued.
LIQUIDATION AND WINDING-UP:
1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the stockholders.
Liquidation can be taken up in any of the following manner:
1. By the corporation itself through the BOD - This is the usual method or procedure of liquidating a
corporation (China Banking Corp vs. Michelin) and although there is no law authorizing it, neither is there
anything that prohibits the BOD from undertaking the same.
a. If this method is resorted to, the board will only have a period of 3 years to finish its task of liquidation
b. Claims for or against the corporate entity not filed within the period will become unenforceable as there
exist no corporate entity against which they can be enforced.
c. Actions pending for or against the corporation when the 3-year period expires are abated, since after the
period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued
(National Abaca & Other Fibers Co. vs. Pore)
2. By a trustee appointed by the corporation - The corporation may opt to convey all corporate assets to a
trustee who will take charge of liquidation
a. If this method is used, the three-year period limitation imposed by section 122 will not apply provided the
designation of the trustee is made within that period.
b. Thus, during the period of liquidation, but before the completion thereof, a dissolved corporation is still
liable for all its debts and liabilities in an action filed against it through its trustee even if the case is filed
beyond the 3-year period of liquidation.
3. By appointment of a receiver - A receiver may be appointed by the proper forum on petition or moto
proprio upon the dissolution of the corporation (Sec. 119)
a. If a receiver is appointed, the 3-year period fixed by law within which to complete the task of liquidation
will not likewise apply because the dissolved corporation is substituted by the receiver who may sue or be
sued even after that period (Sumera vs. Valencia).
b. Thus, it has been held that when a corporation is dissolved and the liquidation of assets is placed in the
hands of a receiver or assignee, the 3 year period is not applicable and the assignee may institute all
actions leading to the liquidation of the corporation even after the expiration of 3 years.
c. Note however, that a receiver may be appointed by the court even while the corporation is a going
concern and does not always imply dissolution of a corporation.
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AMENDMENTS: Section 139 of the RCC introduced the following amendments concerning Corporate
Liquidation:
1.
The exclusion of Banks is now specifically provided, given that they are governed by the New Central
Bank Act and the PDIC Law;
2.
Upon the winding up of corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall now be escheated in favor of the national government,
which used to be the city or municipality where the property is located under the old Section 122.
38. The following are effects of dissolution, except:
A. The corporate entity ceases to exist except for liquidation purposes.
B. It can no longer enter into contracts for furthering its purpose
C. It can no longer apply for a secondary franchise
D. Existing contracts are deemed terminated
39. In case the corporation has been continuously inoperative for a period of 5 years, under the Revised
Corporation Code, it:
A. Is automatically dissolved
B. Provides for a ground to dissolve the corporation
C. Will be placed under delinquent status by the SEC
D. Shall no longer be allowed to operate
40. Under the Revised Corporation Code, any asset distributable to any creditor or stockholders or members
who is unknown or cannot be found shall be escheated in favor of:
A. The national government
B. The city or municipality where the asset is located
C. A charitable institution designated by the corporation
D. The other stockholders
XV. SECURITIES REGULATIONS CODE
PURPOSE: The Securities Regulations Code or RA No. 8799 aims to protect the investing public primarily
through a system of disclosure and provide punishment for fraudulent practices.
PROTECTION OF THE PUBLIC: The Securities Regulations Code protects the public as follows:
1. Requiring full disclosure of information to the public regarding the securities that are being offered and
the issuers, including the filing and approval of the registration statement and the approval of the
prospectus;
2. The requirement of regularly submitting material information to the SEC;
3. Close monitoring of the securities and other circumstances that may affect the same as well as the
persons involved including brokers, issuers, the exchange itself, etc. in order to ensure compliance with
pertinent laws and regulations;
4. Prohibiting and penalizing different fraudulent practices and transactions; and
5. Providing the SEC the powers and functions.
SECURITIES
Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract, instruments, whether written or electronic in character.
(Section 3.1)
The main feature of a security is that a person purchases or acquires the same in the expectation of obtaining
passive income or asset appreciation, that is income or gain obtained through the effort of another person. This
feature makes them attractive and desirable and necessitates the protection of the investing public.
They include:
1. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities;
2. Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of
deposit for a future subscription;
3. Fractional undivided interests in oil, gas or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar
instruments
6. Proprietary or nonproprietary membership certificates in corporations; and
7. Other instruments as may in the future be determined by the Commission.
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Investment contract is a contract, transaction, or scheme whereby a person invests his money in a common
enterprise and is led to expect profits primarily from the efforts of others.
Requisites:
1. An investment of money;
2. In a common enterprise;
3. With expectation of profits;
4. Primarily from the efforts of others (this modifies the Howey Test which requires profits to be derived
“solely” from the efforts of others)
ILLUSTRATION: Power Homes Unlimited Corp. (PHUC) requires an investor to pay $234 to become a Business
Center Owner (BCO), which entitles him to recruit two person who should pay $234 each and out of which he
shall receive a commission of $92. In case the two referrals/enrollees would recruit a minimum of four (4)
persons each recruiting two (2) persons who become his/her own down lines, the BCO will receive a total
amount of US$147.20, and so on.
Here, the BCO is considered as an investment contract because the investor would be earning primarily from
the efforts of his recruits and their recruits, as the pyramid goes on.
REGISTRATION AND REPORTORIAL REQUIREMENTS
REGISTRATION: The Securities Regulations Code (SRC) provides that securities shall not be sold or offered for
sale or distribution within the Philippines, without a registration statement duly filed with and approved by the
SEC (Commission). Prior to such sale, information on the securities, in such form and with such substance as
the Commission may prescribe, shall be made available to each prospective purchaser.
The Commission may audit the financial statements, assets and other information of firm applying for
registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the
interest of the investors and the public in general.
Procedure:
1. Filing of SWORN REGISTRATION STATEMENT containing the information as the SEC may by rule require.
a. Signatories to registration statement: Executive officer, principal operating officer, principal financial
officer, comptroller, principal accounting officer, corporate secretary.
b. Written consent of the expert named as having certified any part of the registration statement,
whenever necessary.
c. Where the registration statement includes shares to be sold by selling shareholders, a written
certification by such selling shareholders as to the accuracy of any part of the registration statement
contributed to by such selling shareholders shall also be filed.
2. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such
securities are proposed to be offered.
3. PUBLICATION of notice of the filing of the registration statement in two newspapers of general circulation
once for two consecutive weeks.
4. Within 45 days after the date of filing, or by such later date to which the issuer has consented, the SEC
shall give an ORDER declaring the registration statement effective or rejecting it.
5. PROSPECTUS under oath that all requirements satisfied and all statements in registration statement and in
such prospectus are correct.
SECURITIES exempt from registration: (GRIB)
1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or
agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said
Government.
2. Any security issued or guaranteed by the government of any country with which the Philippines
maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of
reciprocity: Provided, That the SEC may require compliance with the form and content for disclosures the
SEC may prescribe.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory
body.
4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation
of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
5. Any security issued by a bank except its own shares of stock.
TRANSACTIONS exempt from registration: (BISCEPS SMILE)
1. BROKER’S transaction, executed upon customer’s orders, on any registered Exchange or other trading
market.
2. An ISOLATED transaction in which any security is sold, offered for sale, subscription or delivery by the
owner thereof, or by his representative for the owner’s account, such sale or offer for sale or offer for sale,
subscription or delivery not being made in the course of repeated and successive transaction of a like
character by such owner, or on his account by such representative and such owner or representative not
being the underwriter of such security.
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3. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation,
of securities to its stockholders or other security holders as a STOCK dividend or other distribution out of
surplus.
4. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a
right of CONVERSION entitling the holder of the security surrendered in exchange to make such
conversion: Provided, That the security so surrendered has been registered under the SRC or was, when
sold, exempt from the provision of the SRC, and that the security issued and delivered in exchange, if sold
at the conversion price, would at the time of such conversion fall within the class of securities entitled to
registration under the SRC. Upon such conversion the par value of the security surrendered in such
exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold.
5. EXCLUSIVE SALE: The sale of capital stock of a corporation to its own stockholders exclusively,
where no commission or other remuneration is paid or given directly or indirectly in connection with the sale
of such capital stock.
6. PRIVATE PLACEMENT: The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
7. SUBSCRIPTIONS for shares of the capitals stocks of a corporation prior to the incorporation thereof or
in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no
expense is incurred, or no commission, compensation or remuneration is paid or given in connection with
the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such
subscription is to comply with the requirements of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be registered and duly incorporated, or its authorized,
capital increase.
8. Sale to SOPHISTICATED (Qualified) Buyers: The sale of securities to any number of the following
qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government of the Philippines or any political
subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage
in trust functions;
e. Investment company or
f. Such other person as the SEC may rule by determine as qualified buyers, on the basis of such factors as
financial sophistication, net worth, knowledge, and experience in financial and business matters, or
amount of assets under management
9. MORTGAGE-BACKED SECURITIES: The issuance of bonds or notes secured by mortgage upon real estate
or tangible personal property, when the entire mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
10. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in INSOLVENCY
or bankruptcy.
11. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for
sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of SRC,
to LIQUIDATE a bonafide debt, a security pledged in good faith as security for such debt.
12. The EXCHANGE of securities by the issuer with the existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
The SEC may exempt other transactions where not necessary in public interest or for protection of investors
such as small amount or limited character of public offering. However, an exemption fee of 1/10 of 1% of the
maximum aggregate price or issued value of the securities should be paid.
REPORTORIAL REQUIREMENTS:
1. Annual report composed of a Balance Sheet, Profit and Loss Statement, and a Statement of Cash Flows
certified by a CPA and a management discussion and analysis of results of operation
2. Other periodical reports for interim fiscal periods and current reports on significant developments of the
issuer as the SEC may prescribe as necessary to keep current information on the operation of the business
and financial condition of the issuer.
These reportorial requirements shall apply to an issuer:
1. Which has sold a class of its securities pursuant to a registration
2. With a class of securities listed for trading in an Exchange
3. With assets of at least Fifty million pesos (50,000,000.00) or such other amount as the SEC shall prescribe,
and having two hundred (200) or more holders each holding at least one hundred (100) share of a class of
its equity securities: Provided, however, That the obligation of such issuer to file report shall be terminate
ninety (90) days after notification to the SEC by the issuer that the number of its holders holding at least
one hundred (100) share reduced to less than one hundred (100)
The issuer shall likewise furnish to each holder of such equity security an annual report in such form and
containing such information as the SEC shall prescribe.
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TENDER OFFER
A tender offer is an offer by a person or group of persons to the stockholders of a corporation to tender their
shares for purchase.
Purpose: The rule on mandatory tender offer seeks to protect minority shareholders and provide them with a
fair price for their share whenever a person or group of persons intends to buy a sizable number of shares in
the company.
Mandatory Tender Offer: applies to any person who intends to acquire at least 35% over a period of 12
months (previously 30, increased by the SEC pursuant to Section 72.1 of the SRC) of any class of any equity
security of a:
1. Listed corporations; or
2. Corporations with:
a. Assets of at least P50M and
b. Having at least 200 shareholders who each have at least 100 shares
The rule shall likewise apply even if the acquisition is less than 35% but will result in ownership of over
50% of the total outstanding equity securities of the public company.
The offeror would be required to accept any and all securities thus tendered.
Note that the percentage requirements likewise applies even in indirect acquisitions.
ILLUSTRATION: U Corporation, a corporation listed in the PSE, has two principal stockholder-corporations, X
Corporation which owns 60% and ABC Corporation which owns 17%.
In turn, the principal stockholders of X Corporation are: XA (21%); XB (30%) and ABC Corporation (9%).
XA and XB agreed to sell their shares to ABC Corporation.
In this case, the mandatory tender offer rule applies to ABC Corporation.
1. ABC Corporation will own 60% of X Corporation (21% + 30% + 9%);
2. X Corporation likewise owns 60% of U Corporation, resulting in 36% (60% * 60%) indirect ownership;
3. Accordingly, they will own a total of 53% of U Corporation (36% indirect ownership + 17% direct
ownership).
As such, ABC Corporation is required to make a tender offer to the stockholders of U Corporation.
Transactions EXEMPT from the Mandatory Tender Offer Requirement:
1. Any purchase of shares from the unissued capital stock provided that the acquisition will not result to a
50% or more ownership of shares by the purchaser;
2. Any purchase of shares from an increase in authorized capital stock.
3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security
arrangement where the acquisition is made by the debtor or creditor.
4. Purchases in connection with privatization undertaken by the government of the Philippines.
5. Purchases in connection with corporate rehabilitation under court supervision.
6. Purchases through an open market at the prevailing market price
7. Merger or consolidation.
Process:
1. The offeror will make an announcement of his intention in a newspaper of general circulation, prior to the
commencement of the offer;
2. At least 2 business days prior to the date of the commencement of the tender offer:
a. File SEC Form 19-1 with the SEC including all exhibits thereto and pay the prescribed filing fees
b. Hand deliver a copy of such form including all exhibits to the target company at its principal executive
office and to each Exchange where such class of the target company’s securities are listed for trading.
3. Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar days
after the termination of the tender offer, copies of the final amendments to the form.
FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS
1. Wash sale – any transaction in a security which involves no change in the beneficial ownership. A series of
buy and sale transaction may be placed by one and the same beneficial owner in the exchange which would
not affect any change of ownership of the shares transacted.
2. Matched Order – refers to an order or orders for the purchase or sale of security with the knowledge that
a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of
such security has, or wil be entered by or for the same or different parties.
Wash Sale and Matched Orders are not in themselves illegal. But they are considered fraudulent whenever
they are resorted to in order to create a false or misleading appearance of active trading.
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3. Marking the close – placing of purchase or sale order, at or near the close of the trading period in order to
affect the closing price likewise affecting the opening price the following day.
4. Painting the tape – akin to marking the close but the activity is made during normal trading hours which
involves buying activity among nominee accounts at increasingly higher or lower prices or causing fictitious
reports to appear on the ticker tape.
5. Squeezing the float – part or portion of the issue/security which is outstanding but intentionally held by
dealers or other person with a view of reselling them later for profit. Thereby affecting supply of the security
or its availability while demand remains the same or increases, driving the prices up.
6. Hype and Dump – involves the following steps:
a. Purchase of outstanding capital stock of a dormant public shell company for a nominal amount;
b. Merger of the shell company with the privately held company of the person or group of persons involved
to gain control of the majority of the stocks of the merged entity;
c. Reverse-split of the shares
d. Reissuance of the shares certificates in the name of the merged entity to relatives and associates;
e. Hiring a broker-dealer who would market the stocks of the newly merged entity;
f. Hiring a promoter to “hype” the virtues of the company;
g. When the market reaches the high price, they would “dump” their shareholdings and bail out.
7. Boiler Room Operations – involves an intensive selling campaign through numerous salesmen by
telephone or through direct mail offerings for securities of either a certain type or from a specific issuer.
Investors are induced to purchase through hard-sell techniques based on unfounded predictions and mailing
of misleading market letters.
All 5 above (3 to 7) become illegal/unlawful if its effected to:
a. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly
controlled company by others;
b. Depresses their price to induce the sale of a security, whether of the same or of a different class, of the
same issuer or of a controlling, controlled company, or commonly controlled company by others; and
c. Creates active trading to induce such purchase or sale through said devices or schemes.
8. Circulating or Disseminating Information On Share Price Movement – involves people providing
information that the price of any security listed in the exchange will or is likely to rise or fall because of
manipulative market operations of any one or more persons conducted for the purpose of raising or
depressing the price of the security and thus inducing the purchase or sale of such security.
9. Making False or Misleading Statements – with respect to any material fact, which he knew or had some
reasonable grounds to believe was so false or misleading for the purpose of inducing the purchase or sale of
any security.
10. Pegging or Fixing or Stabilizing the price of security effected either alone or with others through any
series of transactions for the purchase or sale thereof, if done for such purpose.
11. Short Sale – selling the security which the vendor does not own and borrowed only from another. This is
not illegal per se but only regulated.
INSIDER TRADING
Material Non-Public Information: Information that will affect the price of the security or would influence a
person in deciding whether to buy, sell, or hold a security which is not available to the public.
Insider:
1. The issuer.
2. A director or officer of the issuer or a person controlling the issuer.
3. A person whose relationship or former relationship to the issuer gives or gave him access to material nonpublic information.
4. A government employee, or director, or officer of an exchange, clearing agency, and/or self-regulatory
organization who has access to material non-public information.
5. A person who learns such information by a communication from any of the foregoing insiders.
Insider Trading: when an insider in possession of material non-public information buys or sells a security.
Exceptions: a person in possession of material non-public information can buy or sell securities:
1. When he can prove that the information was not gained from an insider;
2. If the other party is identified and that he:
a. Disclosed the information; or
b. Had reason to believe that the other party is also in possession of the information.
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Presumption: a purchase or sale of a security of the issuer made by an insider or such insider’s spouse or
relatives by affinity or consanguinity within the 2 nd degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material non-public information if transacted:
1. After such information came into existence;
2. But prior to the dissemination of such information to the public and the lapse of a reasonable time for the
market to absorb such information.
ILLUSTRATION: Gas Gas Corporation, a publicly listed company, discovered a rich deposit of natural gas. This
information was not made public in order to acquire the lands in the surrounding area at cheap prices. Prior to
the disclosure of the information to the SEC, the directors and officers of the company bought shares of the
Corporation. The prices of such shares went up once the discovery was made public.
In this instance, the directors and officers, being such are considered insiders and are informed of the
discovery, which is a material information which would affect the share price of the corporation. Since they
traded (bought) the shares of the company prior to the disclosure of the information, they are liable for insider
trading.
ILLUSTRATION 2: Assuming, employees of a printing company who handles the printing work of Gas Gas
Corporation came into contact with the exploration reports which were sent to their department by mistake
together with the materials intended to be printed, and such employees bought shares of the company at low
prices and later sold them at huge profits.
In this instance, the employees cannot be considered insiders since they acquired the information not because
of any fiduciary relationship that they with Gas Gas Corporation. Likewise, they obtained the information not by
“a communication” but because of error.
Note: this rule will not apply if the information is relative to a tender offer, because it is unlawful for any person
(other than the tender offeror) who is in possession of material nonpublic information relating to such tender
offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such
person knows or has reason to believe that the information is nonpublic and has been acquired directly or
indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought
by such tender offer, or any insider of such issuer.
Liability for disclosure: It shall be unlawful for any insider to communicate material nonpublic information
about the issuer or the security to any person who, by virtue of the communication, becomes an insider, where
the insider communicating the information knows or has reason to believe that such person will likely buy or sell
a security of the issuer whole in possession of such information.
This is regardless of whether the one to whom the communication was given actually traded on the securities.
INSIDER TRADING WHERE INFORMATION RELATES TO A TENDER OFFER: if the information is relative
to a tender offer, it is unlawful for any person (other than the tender offeror) who is in possession of material
nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or
to be sought by such tender offer if such person knows or has reason to believe that the information is
nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the
issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer.
FILING OF GENERAL INFORMATION SHEET (GIS)
All
1.
2.
3.
corporations shall file their GIS within 30 calendar days from:
Stock Corporations – date of annual stockholders’ meeting
Non-Stock Corporations – date of annual members’ meeting
Foreign Corporations – anniversary date of the issuance of SEC license
FILING OF ANNUAL FINANCIAL STATEMENTS (AFS)
1. Corporations using the calendar year: depending on the last numerical digit of their SEC registration or
license number in accordance with the schedule set by the SEC.
However, any corporations may file their AFS regardless of the last numerical digit or license number on or
before the first day stated in the coding schedule.
2. Corporations using the fiscal year:
a. General Rule: 120 calendar days from the end of the fiscal year;
b. Exceptions:
i. Broker dealers – 110 calendar days from the end of the fiscal year;
ii. Listed companies and Public Companies – 105 days from the end of the fiscal year.
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The AFS, other than the consolidated financial statements, shall have the stamped “received by the Bureau of
Internal Revenue (BIR)” or its authorized banks, unless the BIR allows an alternative proof of submission for its
authorized banks.
41. The Securities Regulations Code aims to protect the investing public through the following, except:
A. Requiring full disclosure of information to the public regarding the securities being offered.
B. Requiring registration of the securities prior to them being offered to the public.
C. Requiring reportorial requirements from the issuer
D. None of the above
42. The following are securities exempt from the coverage of the Securities Regulations Code, except:
A. Securities issued by the Philippine Government or Government of any country
B. Certificates issued by a trustee or a receiver in bankruptcy
C. Securities or derivatives, the sale or transfer of which is under the supervision or regulation of the
Insurance Commission, the Housing and Land Use Regulatory Board, or the Bureau of Internal
Revenue.
D. Securities issued by a bank, including its own shares of stock.
43. The sale of securities to any number of the following qualified buyers are exempt from the registration
requirement, except:
A. Bank
B. Investment House
C. Insurance Company
D. Pension fund or retirement plan
44. The following are considered insiders, except:
A. The issuer
B. A director, officer or a person controlling the issuer
C. A person whose relationship gives him access to material non-public information even after resignation.
D. A person who learns of the material non-public information even by mistake or error
45. Which of the following is not covered by the Mandatory Tender Offer Rule as to X Corporation stockholders:
A. A, B and C plans to acquire 40% of the shares of X corporation
B. D, who owns 20% of the shares of X corporation plans to acquire an additional 32%
C. E, who owns 18% of X corporation, plans to acquire 50% of Y corporation which in turn owns 64% of X
corporation
D. None of the above
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